The reputation of capitalism is being tested. The US Securities and Exchange Commission is investigating whether the cryptocurrency is a complex Ponzi scheme. The Commodity Futures Trading Commission has sued FTX founder, former CEO and disgraced crypto mogul Sam Bankman-Fried, accusing him and his companies of fraud. In September, Meta was fined 405 million euros for breaking European data privacy laws by failing to protect children’s data on Instagram.
Social media, once heralded as an innovation that would foster direct democracy and empower patients to collaborate and share their data securely, has been exposed for mishandling personal information. We now know that these platforms help spread and normalize racist tropes. Meta is said to be sitting on information that discloses the demonstrable harm of its technology to children. Instagram’s continued failure to remove content that glorifies anorexia shows that something is rotten in the pockets of today’s capitalism.
No less a proponent of free-market capitalism than Ayn Rand, the libertarian writer and philosopher, would be horrified by laughable portrayals of modern entrepreneurship: fraudster Elizabeth Holmes of bankrupt blood-testing firm Theranos, and Sam Bankman -Fried from FTX – both former Silicon Valley darlings.
Ayn Rand and the economist Friedrich von Hayek have championed property law as capitalism’s safeguard against corruption: without this protection, non-fungible tokens and ephemeral cryptocurrencies invite theft. When crypto exchanges boomed, investors who kept the bag want cash, not NFTs or crypto. This is why big-name celebrities have been paid cash to promote crypto.
Economist Adam Smith distinguished between productive and unproductive economic effort. Labor is productive if it adds value to something; it is unproductive if this is not the case. What 2022 has shown us is that so-called “smart money” can be terrible at predicting productive value; he often favors speed over the bottom – his due diligence system is broken.
Sequoia Capital, the famed investment firm, reportedly invested in Bankman-Fried’s crypto vision in part because he was brash, went to MIT, and played League of Legends during his fundraising campaign. But it’s easy to be irreverent when people think you’re going to be as rich as Croesus. Today, Bankman-Fried’s mea culpas in the financial media show him restrained.
Capitalism gone wild
The ills of modern capitalism began around 2008 when Silicon Valley and financiers around the world invested in start-ups founded on little more than a PowerPoint presentation and the flashy, impressive credentials of young founding entrepreneurs. Being a charmer and an Ivy League grad could quickly turn your startup into a “unicorn,” a company with an implied valuation north of US$1 billion in unregulated private markets. So, poof! Those multi-billion dollar valuations, when interest rates soared, crashed in 2022.
Rising interest rates have made it more expensive to raise debt capital, the fuel of a start-up culture that celebrates frantic hustle and sleepless nights.
For capitalism to return to its productive roots, we need to slow down the system. Ideas on how to do this abound. These include reducing the short-termism of quarterly earnings reports, strengthening regulation of private markets, and requiring companies to pay for externalities in a fair exchange: for example, users can be compensated for monetization of their personal data. Investors should demand that innovations be validated by outside experts; entrepreneurs, in turn, should demand that early investors commit to long-term investing.
What is capitalism?
Yet none of these ideas solves the underlying problem of modern capitalism; we need to change the messages about what capitalism is and what it is not. Young people need to be told the truth. Steve Jobs was only half right about how far passion can take you; yes, follow your passion, but go at it with your eyes open to the hard truths about starting and maintaining a business.
I was raised to believe that companies should focus on what is real: employing people and making products to solve real problems. Entrepreneurship is difficult. Most businesses fail. Patient, smart growth—in friendly competition with other businesses—is generally a safer strategy than manic ambition with monopolistic intent.
If small and medium-sized businesses can kick-start the global economy, we need to ensure that job creators pursue the right goals at the right pace.
“When you see corruption rewarded and honesty become self-sacrifice, you may know society is doomed,” Ayn Rand warned us in her 1957 classic, Atlas Shrugged.
To promote prosperity, we can put fast-money charlatans in a cold room to play with their crypto and NFTs – and change the narrative of what it means to be an entrepreneur in 2023. As every capitalist knows caring, “reputation isn’t everything — it’s the only thing.